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Great window for another bond issue

ECB measures pave way for gov’t to resort to international markets again to avoid another bailout package By Dimitris Kontogiannis

The European Central Bank’s wide range of measures to boost liquidity, reverse low inflation dynamics and help economic recovery in the eurozone are expected to solidify and even improve conditions for sovereign debt issuance. Greece should take advantage of favorable market conditions and tap the international markets again to partially meet future funding requirements. This is even more crucial since bond markets cannot rally for ever and one cannot rule out a pickup in political uncertainty as the presidential election, scheduled for February 2015, nears.

The ECB announced a set of measures last week to cope with low inflation and revive corporate lending. The measures include a cut in the main refinancing operations (MROs), the deposit rate and the marginal lending facility rate. The cut put the deposit rate in negative territory for the first time ever. The ECB also removed securities market program (SMP) sterilization, which is bound to further increase liquidity in money markets, and said it will conduct an ordinary two-year long-term refinancing operation (LTRO) and new targeted four-year LTROs to boost net lending to the private sector.

Commercial banks will be able to post eligible collateral to get the four-year loans at a fixed rate of MROs at that point in time plus 10 basis points from the ECB and consequently lend to companies. Moreover, European Central Bank Governor Mario Draghi said preparatory work to buy asset-backed securities was intensifying. Even though he did not give any hints as to whether a large Fed-style quantitative easing was in the cards, it is clear that the prospect will help the euro debt markets. This is good news for eurozone bond issuers, including countries, and keeps a window of opportunity open for Greece to borrow at reasonable rates ahead.

Of course, Greece is still in a program and does not have the same degree of freedom as others. The International Monetary Fund and the Germans reminded the Greeks of this recently.

The IMF completed the long-overdue fifth review of the Greek adjustment program on May 30, allowing for the disbursement of more than 3.4 billion euros. Before that, the Fund had made it clear the Greek program, which runs until March 2016, will be fully financed for the next 12 months but extra funding will be needed from then on. Speaking to German weekly Focus a few days ago, Finance Minister Wolfgang Schaeuble said Greece may need a third bailout package, putting it at less than 10 billion euros. This is undoubtedly a politically sensitive issue since a new loan package will be tied to conditionality, resembling the heavily unpopular MoU with the official lenders. Signing such a document would turn it into a certificate of political death for any party, and the coalition government would definitely like to avoid it.

Prime Minister Antonis Samaras has repeatedly said the country will not need a new bailout package. Government officials have gone along, saying the country’s financial needs are fully covered until mid-2015 and the funding needs for 2015-16 will be determined after the results of the ECB’s asset quality review (AQR) bank tests. Greece has about 11 billion euros available for banks but may not use the whole amount to recapitalize the four systemic banks, as will be the case if they can either raise the money from private investors to fill any capital shortfall identified by the ECB or the gap is manageable with available capital resources.

Of course the situation may get more complicated if the official creditors demand that all or a part of the remaining amount after the ECB tests be put aside as a reserve until the end of the current program. On the other hand, Greece may counter it is not responsible for the funding gap up to 11 billion euros because this was created by the unwillingness of national eurozone central banks to roll over maturing Greek bonds as reportedly agreed at the Eurogroup meeting in November 2012. readers are reminded Greece used 11 billion euros upfront from the projected financing of the second adjustment program to buy back bonds with a nominal value of more than 30 billion euros in December 2012, reducing its debt burden by 20 billion euros.

The Greek funding gap for the mid-2015-16 period could be settled much easier and another bailout program be avoided if Greece takes advantage of favorable market conditions on the heels of the ECB’s easing monetary stance to raise 5 billion euros or more from the markets. The country raised 3 billion euros in April by selling five-year bonds yielding 4.95 percent. Traders and analysts think there is a lot of appetite for high-yielding Greek paper currently and Greece should take advantage of that. This is more so since politics could become a hurdle, as uncertainty over the presidential election by the Parliament is bound to increase as we move closer to February 2015 when the vote in Parliament is scheduled to take place.

It would be easier for Greece to tap the markets again if the new cabinet to be sworn in moved swiftly to satisfy all milestones, conclude the sixth review with the troika and open the way for the Eurogroup to decide on the debt relief measures. Whatever the case, Greece cannot let this market opportunity pass without raising more funds from private investors.